Question

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 87,750 units at a price of $60 per unit during the current year. Its income statement for the current year is as follows:

Sales $5,265,000

Cost of goods sold 2,600,000

Gross profit $2,665,000

Expenses: Selling expenses $1,300,000

Administrative expenses 1,300,000

Total expenses 2,600,000

Income from operations $65,000

The division of costs between fixed and variable is as follows:

Variable Fixed

Variable Fixed Cost of goods sold 70% 30%

Selling expenses 75% 25%

Administrative expenses 50% 50%

Management is considering a plant expansion program that will permit an increase of $480,000 in yearly sales. The expansion will increase fixed costs by $48,000, but will not affect the relationship between sales and variable costs.

Required:

1. Determine the total variable costs and the total fixed costs for the current year. Enter the final answers rounded to the nearest dollar.

Total variable costs $

Total fixed costs $

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. Enter the final answers rounded to two decimal places.

Unit variable cost $

Unit contribution margin $

3. Compute the break-even sales (units) for the current year. Enter the final answers rounded to the nearest whole number.___ units

4. Compute the break-even sales (units) under the proposed program for the following year. Enter the final answers rounded to the nearest whole number. ___units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $65,000 of income from operations that was earned in the current year. Enter the final answers rounded to the nearest whole number.____ units

6. Determine the maximum income from operations possible with the expanded plant. Enter the final answer rounded to the nearest dollar. $

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year? Enter the final answer rounded to the nearest dollar. $

8. Based on the data given, would you recommend accepting the proposal?

A. In favor of the proposal because of the reduction in break-even point.

B. In favor of the proposal because of the possibility of increasing income from operations.

C. In favor of the proposal because of the increase in break-even point.

D. Reject the proposal because if future sales remain at the current level, the income from operations will increase.

E. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Choose the correct answer.

Answer 1

• All working forms part of the answer
• As per guidelines, since the questions have too many parts to understand and answer properly, only first 4 parts of the questions have been explained with working and answered.
• Working for Variable cost and Fixed cost for current year

	Variable	Fixed	Total
Cost of Goods Sold [70%/30%]	$1820000	$780000	$2600000
Selling Expenses [75%/25%]	$975000	$325000	$1300000
Administrative expenses [50%/50%]	$650000	$650000	$1300000
Total	$3,445,000	$1,755,000	$5,200,000

• Answer 1 – calculated above

Total variable cost = $3,445,000
Total Fixed Cost = $1,755,000

• Answer 2

A	Total variable cost	$3,445,000
B	Total units sold	87,750
C=A/B	Unit Variable cost [Answer (a)]	$39.26
D	Unit Sale price	$60
E=D-C	Unit Contribution margin [Answer (b)]	$20.74

• Answer 3

A	Current Year Fixed cost total	$1,755,000
B	Unit Contribution margin	$20.74
C=A/B	Break Even in Units	84,619

• Answer 4

A	New fixed cost total under proposed program [1755000 + 48000]	$1,803,000
B	Unit Contribution margin	$20.74
C=A/B	Break Even in Units	86,933